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Answer:
Dear
Ms. Gabriel,
I
think you are referring to closed-end bond funds.
These are a hybrid creature -- part mutual fund, part
stock or part bond or both.
About
closed-end funds in general...
Closed-end
funds, also called publicly traded investment companies,
are similar in some ways to the more well known, open-end
mutual fund that you see so much about. Both open
and closed-end funds are investment companies that
take money from thousands of investors and assemble
portfolios of stocks, bonds, convertibles and other
securities to meet the fund's stated investment goal.
They then issue shares to the public. And, both use
professionals to manage their portfolios.
However,
the similarities end there. These are key differences:
-
Open end funds continually issue new shares as people
invest their money. And, they buy back their shares
when investors sell.
- Not
so with closed-end funds, the type you've asked
about. These funds raise their initial capital by
issuing a fixed number of shares in a process similar
to selling a new stock issue. After this initial
offering, the fund is closed, hence its name.
It does not issue new shares (unless it has a secondary
offering later on). Nor does it redeem shares.
- From
this point on, the fund's shares trade in the secondary
market on one of the stock exchanges. It's very
important that you realize that even though the
word "fund" is in their name, these bond funds
trade as regular stock, fluctuating in price
from day to day.
- Shares
cannot be purchased directly from the fund itself.
You must buy and sell shares through a stockbroker,
just as you do when trading common and preferred
stock.
You
can learn more about the closed-end bond funds offered
at BUYandHOLD by clicking
here.
About
closed-end bond funds in particular...
These
funds, as their name implies, invest in a range of
bonds, including high quality corporates or lower
rated so-called "junk" bonds -- which incidentally
are not always truly junk. Some invest only in U.S.
government bonds (Treasuries, mortgage-backed securities,
etc.) or in municipal bonds or bonds of foreign governments.
Selecting
a closed-end bond fund...
You
should go about picking a closed-end fund as you would
any other investment. Determine your goal and the
amount of risk you wish to take and then find a fund
that meets your requirements.
I
recommend that you begin by studying the section about
closed-end funds in the Value Line Investment Survey.
This weekly research publication is available at most
libraries. It reports on select closed-end funds,
some of which are bond funds, under the category "Investment
Company Industry." For more information about this
independent publication, go to: www.valueline.com.
In
Value Line, you'll find out what type of bonds
a closed-fund invests in, the dividend a fund is paying,
what its risk factor is, if it is selling at a discount
or premium from its net asset value and how much is
has fluctuated in price over the years.
You
would learn, for instance, that ACM Income Fund holds
mainly U.S. government and agency bonds such as Treasury
notes and mortgage-backed securities while Nuveen
Municipal Value Fund invests primarily in municipal
bonds.
Another
source for research on closed-end funds is Morningstar,
also available at libraries and on line at www.morningstar.com.
However, you need to know the name of the closed-end
fund in order to get research, so I recommend you
begin with Value Line.
Stay
tuned...next week in this column, we'll discuss net
asset value, an important factor to know about when
investing in closed-end funds -- whether it be a stock
or bond closed-end fund.
Good
luck!
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